By: Sabrina Serber
On July 28, 2022, the Investor Justice Act of 2022 was introduced in the Senate to amend the Securities Exchange Act of 1934 to establish a grant program to fund qualified investor advocacy clinics among other purposes[1]. The bill, introduced by Senator Catherine Cortez Mastro was read twice and introduced to the Committee on Banking, Housing, and Urban Affairs for further review[2]. Now is a crucial time for this bill to get passed. Securities Arbitration Clinics around the country are shutting down because of a lack of resources. Broker-dealers are giving up their license to become Investment Advisors and escape the smalls claims arbitrations and the heightened fiduciary duties that Broker-Dealer have. Still there are retail investors who need help, but whose claims are too small for law firms to even consider taking their case. The Investor Justice Act would help allocate federal funds to these clinics and help low-income investors who have been wronged by their brokers recover their money.
The impetus of Security Arbitration Clinics started through the efforts of SEC Chairman Arthur Levitt in the 1990s who argued that “small investors often wouldn’t pursue valid claims in arbitration because any potential recovery would be too low for private attorneys to take them on as clients[3].” The Clinic openings themselves were spurred by FINRA Foundation funding[4]. These clinics take on claims valued at less than $100,000 and made by low-income retail investors typically retired or older in age. These clients would not be able to reach out to other legal counsel whether because of the size of their claims or the inability to pay legal expenses. These claims are typically against brokers who have mismanaged their accounts, risking the client’s livelihood, ability to pay for medications, or worse.
FINRA funding started these clinics, but as time went on these funds ran out and clinics around the country started to close. Today, there are only ten Securities Arbitration Clinics taking cases[5], five of which are in New York while the other five are spread between Florida, Illinois, New Jersey, Pennsylvania, and the District of Columbia[6]. Because of the nature of these clinics, where students take on the role of representing these clients while supervised by attorneys, and because of limited funding, most clinics are not able to take on out of state claims, and the ones they do are limited[7].
The University of Miami is home to one of these clinics[8], and I am fortunate to be one of the student interns working with the clinic. I have seen first-hand just how limited clinics are now due to lack of funding in representing certain cases. As Clinic Director Scott Eichhorn said in a recent interview for Wealth Management, “[t]here is a vast underserved market of people who have lost money investing with brokers who cannot find representation… [t]hey’d never find an attorney unless it was part of one of these programs, and the programs are extremely limited[9].” Professor Eichhorn recounts in this interview that the Investor Rights Clinic at University of Miami declines 90% of cases it receives because of the limited resources the clinic has[10]. This is where the Investor Justice Act of 2022 comes in. If passed, it would allow for Securities Arbitration Clinics around the country to receive federal grants in order to continue to help low-income retail investors. This means the ability to take on more cases and help more investors. As clinics around the country are shutting down or are becoming less able to take on a larger case load, now is the time for help. These clinics need this funding, and they need it sooner rather than later. Not only are investors making small claims against bad brokers, but the outcome of these arbitrations, if successful can protect so many others from
[1] Investor Justice Act of 2022, S. 4657, 117th Cong. (2022).
[2] S.4657-117th Congress (2021-2022): Investor Justice Act of 2022, S.4657, 117th Cong. (2022), https://www.congress.gov/bill/117th-congress/senate-bill/4657.
[3] Patrick Donachie, Lost in Arbitration, Wealth Management, (November 21, 2022), https://www.wealthmanagement.com/industry/lost-arbitration.
[4] Id.
[5] There is one in Nevada acting only as a policy center and not taking on clients at all. Donachie, supra, note 3.
[6] How to Find an Attorney, FINRA, https://www.finra.org/arbitration-mediation/how-find-attorney.
[7] This limitation includes the FINRA remote proceeding process which caps recovery at $50,000.
[8] The Investor Rights Clinic at University of Miami School of Law.
[9] Donachie, supra, note 3.
[10] Id.
